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Special Report

Published on: Oct. 21, 2022, 3:59 p.m.
Into the headwinds
  • Illustration: Panju Ganguli

By Rakesh Joshi. Executive Editor, Business India

Finance Minister Nirmala Sitharaman’s visit to Washington DC in the US to attend the annual meetings of the IMF-World Bank during 11-16 October did not come at a propitious time. The annual IMF-WB meetings were taking place when most emerging markets were getting squeezed by rising inflation and borrowing costs against a backdrop of slowing global growth. Just after she had landed there, the IMF cut its projection of India's economic growth in 2022-23 to 6.8 per cent from 7.4 per cent in July and 8.2 per cent in January. India had grown at 8.7 per cent in 2021-22, thanks largely due to the low base of the previous fiscal.

Earlier, the World Bank had projected a growth rate of 6.5 per cent for the Indian economy for 2022-23, a drop of 1 per cent from its previous June 2022 projection. The UNCTAD has projected India’s growth rate even lower – at 5.7 per cent. For the next fiscal, it is forecasting a further lower rate of 4.7 per cent. The UN body, in a region-wise analysis, says that economic activity in the largest economy of the south and west Asia is being hampered by higher financing costs and weaker public expenditures, resulting in a deceleration in GDP growth. 

All these projections are lower than the 7 per cent, which the Union finance ministry and RBI mandarins were hoping for this year. Even Sitharaman had said (as recently as on 16 October in Washington) that India will stay on course and is projected to grow about 7 per cent.

‘Bright spot’

The government appears to be drawing comfort from the assessments made by the likes of Hans Timmer, World Bank Chief Economist for South Asia, who says India has done relatively well in the region, with the advantage that it doesn't have a large external debt and is guided by prudent monetary policy. The economy has fared especially well in the services sector, especially service exports. The IMF managing director Kristalina Georgieva too has lauded India's economic growth and said that the country deserves to be called a ‘bright spot on an otherwise dark horizon’. 

Recently, S&P said that India may escape the brunt of global recession as it was never coupled fully with the global economy, and so is relatively independent of global markets. A lot, however, depends on how global fund flows behave, in case there is a recession in the US and Europe. Raghuram Rajan, former governor, RBI, also feels that the Indian economy may escape with ‘minor cuts’. 

But, according to other economists, the possibility of a downslide is very much there, reflecting a weaker-than-expected outturn in the second and third quarters and more subdued external demand. Global drags, such as elevated crude prices, shrinking corporate profitability, tight monetary policies, aggressive rate hikes, recession fears, inflation and diminishing global growth prospects will weigh on India’s growth outlook. The slowing growth in our industrial output and exports backs this prognosis. 

“While the ongoing broad-basing of domestic economic activity is supportive, the key risks are slowing global growth, which would curb India’s exports and create uncertainty in private capex plans,” says Dharmakirti Joshi, chief economist, CRISIL. “These would put downward pressure on our GDP growth”.

  • Sitharaman: India will stay on course

Even as the economy has recovered to its pre-Covid level, large parts continue to be mired in stress. For instance, micro, small and medium enterprises continue to struggle. An indication of this is that 16.4 per cent of those who availed credit under the Emergency Credit Line Guarantee Scheme of the government defaulted and have not been able to repay their obligations owing to financial difficulties. This is a sector which the government and most economists have glossed over in their assessments of the state of the economy. 

Considering that MSMEs employ a sizeable section of the labour force, their continuing struggles are bound to affect labour market prospects. In fact, as per the latest periodic labour force survey, the labour force participation rate in urban areas is lower than pre-Covid levels, while in rural areas, wage growth continues to be subdued indicating labour market slack.

Significant slowdowns

In recent months, our economic growth figures have begun reflecting the significant slowdowns evident in the largest economies -- a US GDP contraction in the first half of 2022, a euro area contraction in the second half of 2022 and prolonged Covid-19 outbreaks and lockdowns in China, with a growing property sector crisis. This was evident in the first-quarter GDP figures where growth was 13.5 per cent against the 16-18 per cent being projected earlier.

Global growth is forecast to slow from 6.0 per cent in 2021 to 3.2 per cent in 2022 and 2.7 per cent in 2023. This is the weakest growth profile since 2001, except for the global financial crisis and the acute phase of the Covid-19 pandemic. As such, it may be difficult for India to totally stave off the spillover effects of crisis.

Till now, North Block had been sanguine about the situation, lulled by factors like an uptick in the April-June GDP growth and steady tax revenues with monthly GST collections averaging Rs1.48 lakh crore. On the external front, it was also drawing comfort from the moderation in commodity prices due to lower demand in the slowing global economy. But now, within the top levels of the government, there is a gnawing feeling that the cascading impact of a worse-than-anticipated global downturn may dent the budget arithmetic in the second half of the fiscal year.

The worry points are: pressure on the twin deficits (fiscal and current account); low if not negligible across-the-board private investment; distress in the MSME sector; and the dampening effect of the RBI’s policy rate hikes on private consumption. 

Global recession is round the corner, if not already here. According to authoritative estimates, more than a third of the global economy will contract in 2023, while the three largest economies -- the US, the EU and China -- will continue to stall. "In short, the worst is yet to come, and for many people 2023 will feel like a recession," says Pierre-Olivier Gourinchas, the IMF's economic counsellor and head of research.

Even if India were to escape the full impact of a global recession, the risk of monetary, fiscal or financial policy mis-calibration has risen sharply amid high uncertainty and growing fragilities. The road ahead is being paved with uncertainty by the lingering Russia-Ukraine conflict, a slowdown in China and what the IMF has termed a ‘cost of living crisis’ (so vividly manifest in the UK).

  • Georgieva: India is a bright spot on an otherwise dark horizon

RSS rap

With a general election less than two years away, the Modi government has to handle the economic situation extra carefully. The RSS general secretary, Dattatreya Hosabale, who is possibly the heir apparent to the top position of sarsanghchalak of the RSS, has already sounded the alarm bells. He recently painted a grim picture of the nation’s economy, highlighting worrying levels of poverty and unemployment. 

The comments serve as an uncomfortable reality check for the Modi government as the RSS has, in the past, acted as a weather vane for BJP governments. That these statements have come at a time when the Congress leader Rahul Gandhi is getting some traction with the people through his Bharat Jodo Yatra is no coincidence. The idea is clear: to ensure that, in an era of inflation, the RSS and the BJP don’t pay too high a price.

But, while the RSS would like the government to tackle poverty and unemployment, can this be done without taking liberties with the defined fiscal target? In February 2022, Sitharaman proposed a glide path to bring down fiscal deficit to 4.5 per cent of GDP by 2025-26. For Budget 2022-23, the fiscal deficit was estimated to be 6.4 per cent of the GDP. For 2021-22, the it was revised to 6.9 per cent, against 6.8 per cent projected in the budget estimates. Sitharaman says that the government remains committed to the glide path and has not strayed from it.

Subsidy spoiler

However, notwithstanding the healthy growth in tax revenues and collections from other levies such as the windfall taxes on domestic crude oil production, there are concerns that a higher subsidy outgo will pose upside risks to the fiscal deficit target. In the budget, for instance, the food subsidy had been pegged at Rs 2.06 lakh crore, while the fertiliser subsidy has been budgeted at Rs1.05 lakh crore. However, considering the extension of the free food scheme, and higher prices of fertilisers and their inputs post the Russia-Ukraine conflict, it is likely that the subsidy outgo of the government will exceed the budgeted allocations significantly. 

Also, a high interest rate regime means that the government’s fiscal deficit increases further due to a higher borrowing rate on G-Secs. If the government cuts down on fuel tax to tame inflation, this will further decrease revenues.

In fact, Sitharaman admitted in Washington DC on the sidelines of the IMF-WB meet that availability of fertilisers is an issue. "Our soil is fairly fatigued in some parts," she said. "Last year, we gave 10x the price for imports. Farmers need fertilisers at an affordable price, and we can’t raise the price. The government has footed the entire fertiliser price increases," she said. All this could make it challenging to meet the fiscal deficit target of 6.4 per cent. 

Indeed, Sitharaman has several worries to tackle. Driven by rising food prices, retail inflation accelerated to 7.41 per cent in September, the fastest pace in five months. Inflation has been eating into household budgets. A major part of consumer inflation is due to rising global oil prices, of which India is a net importer. There is limited wiggle room for the government, despite all the hype of cheaper imports from Russia. 

  • Rajan: Indian economy may escape with ‘minor cuts’

Even as the economy has recovered to its pre-Covid level, large parts continue to be mired in stress. For instance, micro, small and medium enterprises continue to struggle. An indication of this is that 16.4 per cent of those who availed credit under the Emergency Credit Line Guarantee Scheme of the government defaulted and have not been able to repay their obligations owing to financial difficulties.

Considering that MSMEs employ a sizeable section of the labour force, their continuing struggles are bound to affect labour market prospects. In fact, as per the latest periodic labour force survey, the labour force participation rate in urban areas is lower than pre-Covid levels, while in rural areas, wage growth continues to be subdued indicating labour market slack.


Oil is the ideal fuel for inflation. The inflation number has now stayed well above the RBI’s upper tolerance band for the ninth straight month. This is likely to pressure the RBI to intensify its interest rates hikes. 

Aditi Nayar of ICRA, adds, "The excessive rainfall in early October 2022 may adversely impact the kharif harvest and delay rabi sowing, thereby posing a material upside risk to the food inflation outlook. However, the impact of the same on the y-o-y food inflation prints is likely to be partly mollified by the high base that lies ahead for H2 2022-23." 

Indeed, unseasonal rains have pushed up the prices of vegetables which are expected to remain firm till November. According to traders, tomatoes have become costlier by more than 50 per cent in retail markets since the beginning of this month. Traders expect onion prices to go up to 40-50 per cent as heavy rains have damaged stocks in Maharashtra. Unseasonal rains in Uttar Pradesh have damaged the potatoes that are harvested early and delayed the sowing of the late variety. Prices of the tuber may increase by Rs7-8 a kg before the new crop arrives in the market.

To tame inflation, the Reserve Bank of India's Monetary Policy Committee (MPC) has hiked the repo rate by 190 basis points since March, 50 points alone coming in its policy statement on 30 September. With the latest increase, the rate currently stands at 5.9 per cent.

Falling rupee

Then there is the falling rupee. About 10 per cent depreciation of India's rupee against the dollar this year has made imports costlier for consumers and businesses. Pressures are also visible in imported fertilisers, a key component in agriculture — which makes for nearly a sixth of our economy and about 42 percent of the employed workforce. On top of that, as per the latest National Statistical Office (NSO) data, industrial growth, as measured by the Index of Industrial Production, has contracted 0.8 per cent in August, as against 2.4 per cent in July.

As per the bureaucratic copybook, which successive FMs have followed of late, these concerns will now guide the finance ministry’s formulations in the framing of the union budget which is to be unveiled three months ahead. During a fireside chat on ‘India’s Economic Prospects and Role in the World Economy’ at the Brookings Institution which coincided with the WB-IMF meet in Washington, DC, Sitharaman said, "Growth priorities will be kept absolutely on the top for the upcoming Budget 2023.Inflation concerns will have to be addressed, which will be the point of balance." It is now being said that these comments hold clues on what to expect when she stands up for the Budget speech on 1 February.

  • Buy when there is blood in the streets

    Baron Rothschild, 18th century banker

The government has kicked off its annual Budget-making exercise for 2023-24 on 10 October and would look for ways of reviving growth amid a gloomy global outlook. The meeting started with consultations with various ministries and departments on the revised estimates of expenditure for the ongoing fiscal year and the fund requirement for 2023-24. The month-long deliberations would end on 10 November.

Budget talks

The period which follows the ministerial consultations is important because it is then that the FM engages with stakeholders like India Inc.etc. In fleshing out her new budgetary proposals, Sitharaman must remember that India will not continue to attract investors simply because it is doing better than its peers, who are more seriously caught up in the global volatility. India has a long way to go towards building infrastructure and enacting reforms that can attract foreign investors, many of whom still find it challenging to do business in the country. 

There are ideas galore about what Sitharaman can do. Pierre-Olivier Gourinchas of the IMF says that, while the government has undertaken a number of reforms, it needs to unleash reforms not just to stabilise growth but also unleash the economy’s full potential. "There is a range of areas where, you know, public infrastructure broadly defined, not just in terms of buildings and roads, but also investing in human, investing in people and human capital, health, education, etc. is going to help the economy really, really grow very fast on a continuous basis," he says.

In the aftermath of the first wave of Covid-19, experts had felt the need to invest in digital infra to bridge the divide. Janmejaya Sinha, chairman, BCG India, had even suggested that the government must introduce a new paradigm, where every Indian has a smart phone with easy access to data. As the experience of the Covid lockdown showed, a smartphone permitted access to health care, goods & services, digital payments, re-skilling and education. Those who had smart phones were advantaged; those who didn’t suffered. For the idea to succeed, smartphones could be given free or perhaps subsidised.

Digital education, which can be a powerful lever in reducing educational inequality in the medium-term, should be promoted. Another suggestion was that the government and industry should become paperless. A simple start would be if paper was removed from all bureaucratic offices and all related work done digitally. Some work was done but the ideas remained incomplete. 

While the climate crisis has now become part of a green economy agenda, more needs to be done. Why not now push for a fossil-free, renewable electricity system in the budget? 


At this point, India needs a budget which can deflate the headwinds that are being felt now. The looming global recession fears and high energy prices can lead to a higher unemployment rate which fell to the lowest in more than four years in September at 6.43 per cent. But this point coincides with the festival season, when many find jobs. And, it came after a record surge of 8.3 per cent in the unemployment rate in August.

This appears to have lulled the government into complacency and the FM isn’t unduly worried about jobs. "Employees' Provident Fund Organisation (EPFO) enrolments have doubled in the last quarter, indicating that employment has doubled," the FM said, adding that the data collected so far relied only on surveys and approximations.

  • Gourinchas: the worst is yet to come

    Gourinchas: the worst is yet to come

"I want to recognise that there is a lot of reshaping, recasting that’s happening in the Indian economy,” she added. “Good churn happening in the Indian economy, nature of employment is being speedily ramped up". Of late, the Modi government has been emphasizing on the formalisation of jobs. So time and again, the EPFO data is cited by ministers and officials to show an increase in formal jobs.

However, a large number of Indians work on farms or have 'informal' jobs. The trend there has been different from the data visible at the EPFO. In the last Budget, when questioned about the bulk of India’s employment outside the formal sector, the government said it was relying on building infrastructure as a primary source of job creation.

That emphasis may continue. "For the economy to revive, we need asset creation. This has a multiplier impact," the FM said in Washington, adding, "We have understood the virtue of spending on asset creation, including via borrowing."

The government has also announced the Gati Shakti initiative in the Budget 2022-23. The Budget also proposed a Unified Logistics Interface Platform for data exchange among various operators through APIs to achieve regulatory and operational streamlining. The National Logistics Policy was recently unveiled by Prime Minister Narendra Modi. Apart from this, investments in the infrastructure sector were also announced.

Infra spend

This focus on and growth of infrastructure will cost a lot of money, and Sitharaman has promised to spend within the means. Apart from taxation and borrowing, the other source of funds has been disinvestment or the sale of government shares in public companies. “No sector is reserved for the public sector anymore — this was my budget announcement," FM said. "Only in four areas the public sector will maintain a minimum presence. For example, in the telecom sector, only one public sector unit may remain. Others will be amalgamated or privatised," she said.

  • Hosabale: sounding alarm bells

The government had set its divestment target for 2022-23 at a modest Rs65,000 crore, after reducing the target by more than 55 per cent to Rs78,000 crore for 2021-22. For 2022-23, the government has raised a little over Rs24,500 crore so far.

After likely losing the tag to Saudi Arabia this year, the IMF expects India to become the fastest growing major economy in the world again next year. If that happens, the Modi government’s publicity machinery will go on the overdrive at defying the global trend. But private forecasters such as Nomura believe policy makers’ optimism about 2023-24 prospects may be misplaced as the ripple effects of global downturn may be underestimated, and growth could well slip to 5.2 per cent.

Either way, relative prosperity compared to the world alone will not suffice. India needs to not only grow significantly faster than its faltering pre-pandemic trajectory but also deliver better quality growth that is inclusive and meets the aspirations of millions of its youth who constitute its demographic dividend. The country has only a small window now to cash in on this sweet spot. Currently, given India’s low per capita income, the sustained surge in prices has hit most households’ spending capacity, and could even cramp their ability to invest in the next generation’s education.

Already, the assertions by sundry ministers that India had managed to rein in inflation and it is not a priority concern may have been premature, as August and September witnessed resurgence in price rise from July’s minor relief of 6.71 per cent after staying above 7 per cent in the first quarter.

That is why the government, Sitharaman in particular, needs to work diligently on Budget 2023-24 and deftly navigate the second half of this year. India may be doing better than the rest of the world. But is the recovery good enough? Sunil Subramaniam, MD & CEO, Sundaram Mutual, recently paraphrased Raghuram Rajan’s assessment made several months ago, “I would feel that, in the land of the blind, a one-eyed man is king and that is the status of India today.” That could just about sum up the story. Sitharaman needs to prove the thesis wrong.

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